Jamaica's pension industry is already projecting foreign exchange (FX) gains from the recent move by the Bank of Jamaica's (BOJ) to increase the allowable limit on investment in foreign exchange instruments from 7.5 per cent to 10 per cent.
The increase in the FX cap comes into effect April 1, 2021. Pension experts believe the move will help to strengthen the sector. The Pension Industry Association of Jamaica (PIAJ) reports that the second of the two-part adjustment is aligned to the needs of its members.
This is largely because the adjustment allows for further diversification of their asset base, thereby improving resilience to market dynamics.
According to PIAJ President Sanya Goffe, “this development will support the increased ability for pension funds to hedge against the impact of depreciation in the Jamaican dollar, inflation and, by extension, will deliver an increase in foreign exchange gains over the medium to long term.”
In pointing to the importance of pension funds getting access to securities that preserve and enhance value, Goffe explains that this will be to the benefit of tens of thousands of Jamaicans who depend on higher returns to power their retirement more so given that pension funds exist for the benefit of its members and future retirees.
Currently, approximately 11 per cent of private sector workers in Jamaica are participating in some form of private pension arrangement.
HARD FIGHT TO GET THE CHANGE
The PIAJ president declares that the lobby group fought hard for the change “as a well-designed sector with a diversified asset base is fundamental to a first-class pension framework, noting that in a country with an increasingly aging population, this expanded opportunity is critical.” According to the PIAJ president, “a larger allocation to foreign currency assets will provide a layer of protection to the real value of the funds under management and will improve the diversification opportunities available to trustees and fund managers.”
This, she contends, will result in increased foreign exchange gains that will redound to improved investment portfolio values benefiting all, over the medium to long term. The Bank of Jamaica (BOJ) regulation will allow for investments to be made in foreign currency instruments issued by the Government of Jamaica or issued or guaranteed by the governments of the US, UK, and Canada.
However, Goffe made the point that the PIAJ has been in discussions with the BOJ about widening the menu of allowable foreign currency assets to include real estate, global bonds issued by other governments, corporate bonds and equity. “Although negotiations were in the works prior to the pandemic, the impact of the crisis on the JSE (Jamaica Stock Exchange) has underscored the need for expanded investment opportunities,” she explains.
DECLINE IN VALUE OF PENSION ASSETS IN 2020
Data published by the Financial Services Commission for the September 2020 period pointed a seven per cent reduction in the value of industry assets when compared with the data published for the same period for the previous year. The main driver of this decline was the local stock market, where for the 2020 calendar year, the market was down by 22 per cent unlike its US counterpart, which ended the year up 16 per cent.
Goffe points out that “current pension regulations do not currently allow local superannuation funds and retirement schemes to invest in the US stock market and so they were unable to benefit from the North American rebound…Therefore to the extent that pension funds in 2020 had exposure to the local stock market, the returns on these funds would have more than likely been negative.”